First Principles IAS · Current affairs

The monthly magazine, September 2026 · Environment and Disaster Management › Climate finance, carbon markets and carbon pricing

Printed on · firstprinciplesias.com/current-affairs

India's carbon market meets a border tax: the UK recognises the Carbon Credit Trading Scheme

LeadPrelims and Mains8 Sep 2026

Why in news

On 8 September 2026 the Commerce Ministry said that the United Kingdom had placed India's Carbon Credit Trading Scheme on its list of qualifying carbon pricing mechanisms under the British Carbon Border Adjustment Mechanism, which starts on 1 January 2027.
It is the first recognition of India's carbon market as a carbon price by a country that runs a border charge.
The European Union, whose own border mechanism began charging in January 2026, has not.

1 January 2027the UK's border mechanism starts
8 September 2026the recognition conveyed to the Bureau of Energy Efficiency
about 490 entities in 7 sectors now carry emission intensity targets under the Indian scheme
2025-26 and 2026-27the first two compliance years, with 2023-24 as the baseline
75.36 euros a tonnethe EU certificate price in the first quarter of 2026

A carbon border adjustment charges an importer for the carbon emitted in making a good, so that it bears the same carbon cost as one made at home. Its stated purpose is to stop carbon leakage, the shifting of production to countries with weaker rules.
Both the EU and the UK mechanisms deduct any carbon price the good has already paid in its country of origin. The whole question for India is whether its scheme counts as such a price.
The Carbon Credit Trading Scheme was notified in 2023 under the Energy Conservation Act, 2001, as amended in 2022. It grew out of the Perform, Achieve and Trade scheme, which has traded energy savings since 2012.

Compliance mechanism: obligated entities receive greenhouse gas emission intensity targets, emissions per unit of output. An entity that beats its target earns Carbon Credit Certificates; one that falls short must buy and surrender them.
Targets were notified in October 2025 for aluminium, cement, chlor alkali and pulp and paper, and in January 2026 for petroleum refining, petrochemicals and textiles, about 490 entities in all. Targets for iron and steel and fertilisers are still pending.
Offset mechanism: entities outside the obligated list can register projects, such as renewable energy, afforestation or methane capture, and earn certificates voluntarily.
The Bureau of Energy Efficiency administers the market, Grid Controller of India runs the registry, the Central Electricity Regulatory Commission regulates trading on the power exchanges, and a National Steering Committee chaired by the Power Secretary steers it. The Indian Carbon Market portal opened on 21 March 2026.

A UK importer of Indian steel, cement or aluminium can claim relief equal to the effective carbon price the consignment bore under the Indian scheme, with evidence and verification.
The relief scales with the Indian carbon price. No certificate has traded yet, so the market has set no price, and the relief is small to start with.
Steel, the largest Indian export the mechanism covers, has no intensity target yet. Until it does, a steel mill bears no Indian carbon price and gets no deduction.
The recognition sits on an administrative list, not in a treaty. It was not part of the India UK trade agreement in force since 15 July 2026, which gave no carbon border carve out.

The EU mechanism entered its paying phase in January 2026; importers buy certificates from February 2027 for goods shipped in 2026. Iron and steel are about 90 per cent of the Indian exports it covers.
The EU deducts a carbon price paid at home, but it has not recognised the Indian scheme, whose intensity targets mean a mill that meets its target pays nothing at home and so gets no deduction (see Carbon Border Adjustment Mechanism).

Separate the diplomatic gain from the economic one. Diplomatically the recognition is large: a developed country has accepted that an intensity based market, the kind India chose because it lets output grow, is a carbon price, a precedent to carry to Brussels.
Economically the gain is small for now, for two reasons the headlines skip: the relief equals the Indian carbon price, and the Indian market has not yet traded a certificate; and steel, the export that matters, has no target at all.
The trade off underneath: a higher Indian carbon price would earn more relief at the British border, but it would also raise compliance costs for every obligated plant at home, most of which sell nothing abroad. India is, in effect, asked to tax its own industry so that a foreign border tax bites less.
Two answers to the same measure: the BRICS declaration of 12 September called such measures unilateral and discriminatory; the UK recognition shows the same measure can also be negotiated with.

Notify the iron and steel targets, since steel is where both border mechanisms bite.
Set the market running, so that there is a price to claim relief against.
Take the UK precedent to the EU and argue for recognition of intensity based schemes.
Fund green steel through the offset mechanism and the carbon market, so that the plants built in this decade do not lock in coal.

Prelims: the scheme was notified in 2023 under the Energy Conservation Act, 2001 as amended in 2022; the Bureau of Energy Efficiency administers it; two mechanisms, compliance and offset; targets are on emission intensity; the UK mechanism starts 1 January 2027 and covers aluminium, cement, fertiliser, hydrogen, and iron and steel; the EU's began its paying phase in January 2026.
Mains: "Recognition by one border tax does not make India's carbon market a carbon price." Examine the UK's recognition of the Carbon Credit Trading Scheme and what India must do to benefit from it.

Carbon Border Adjustment Mechanism (September): the EU side, and why intensity targets earn no deduction there.
Steel: carbon lock in and the two routes (September): the plants whose route the carbon price should decide.
BRICS as a negotiating bloc (September): the declaration that called border measures discriminatory.

Sources

ANI, 8 September 2026, “UK includes India's carbon credit trading scheme in list of qualifying carbon pricing mechanisms under CBAM”
Legal 500, “The UK recognises India's Carbon Credit Trading Scheme under CBAM: a positive step forwards”
International Carbon Action Partnership, “Compliance obligations under India's Carbon Credit Trading Scheme enter force for seven sectors”
The Indian Express, 23 September 2026, “Experts Explain: How the European Union's carbon tax works, and why BRICS pushed back against it”
PIB, 12 September 2026, “BRICS New Delhi Declaration”